Cash in circulation will slightly more than double over the
next six months, as the Reserve Bank of Zimbabwe (RBZ) injects an extra $1
billion to satisfy legitimate demand for coins and small notes, but still make
it impractical to use cash for larger transactions.
RBZ Governor Dr John Mangudya said yesterday that the $2
bond coins and $2 and $5 notes being eased into circulation will, when added to
$855 million bond notes and coins already in use, bring issued cash to just
under 10 percent of total deposits in both local and foreign currency.
Cash shortages have been building up in the informal
sector, including public transport, where mobile and digital payments are rare,
although cash transactions have almost vanished in the formal sector.
By doubling the amount of cash in circulation, the RBZ
hopes to ease pressures that have seen high premiums for cash, yet by keeping
the top denomination at $5, it is hoped that significant payments in the formal
sector will remain digital rather than see people shovelling coins out of
wheelbarrows.
That should ease demand for cash, making it flow better
through the system.
Taking into account the inflation of the past year, the
latest move puts the total value of all local currency notes and coins,
including those still to be issued, back roughly where it was a year ago.
Many, though, still think that some people will continue to
sleep outside banks to head the queue for small daily allocations of cash and
that the market for notes and coins will continue, although premiums will fall
significantly because of extra supply.
But as long as there is even a tiny premium, some will find
it worthwhile to queue overnight.
Economists here thought the RBZ should think of ways to
stop all the new cash being almost absorbed into the informal sector, as has
happened with earlier allocations.
They also dismissed fears that the cash injection would
trigger inflation, arguing that price hikes were a result of many internal and
external factors within an economy and that at 10 percent of deposits, the
amount of cash in circulation was still be low by international standards.
Addressing Members of Parliament attending the 2020
National Budget seminar at Elephant Hills Resorts here, Dr Mangudya said the
cash will entail new $2 bond coins, $2 and $5 notes of the new Zimbabwean
dollar reintroduced in June this year. During the same address, the central
bank governor said fundamentals were showing that the local currency, renamed
Zimbabwe dollar in June after the Government outlawed the use of multi-currency
adopted in 2009, should exchange at $5-$8 against the US dollar.
The central bank is seeking to eliminate the prevailing
cash shortages, which the country experienced since 2016 as well as huge
premiums being charged for cash.
Dr Mangudya said the regional average of the total cash to
deposit ratio was 12 percent, but countries such as Tanzania have up to 15
percent of their deposits in the form of cash.
At the moment, Zimbabwe has about $19 billion in
circulation, with only 4,5 percent being cash.
The actual money supply is skewed, with about half being
funds held in foreign currency accounts, while the balance are local dollars,
which have not been expanding in number since the Government moved to a primary
budget surplus a year ago.
“Zimbabwe has the lowest (cash to deposits) ratio,” Dr
Mangudya said. “Zambia has 10 percent, Tanzania 15 percent, Rwanda 9,65
percent, Uganda 17,65 . . . We want to increase to 10 percent over the next six
months on a drip feed basis.”
Dr Mangudya said if the total deposits were converted into
US dollars at the ruling interbank rate of 15,5, the country essentially had
US$1,2 billion deposits, which is very little to sustain the economy, stressing
the need to enhance forex generation.
“Fifty percent is foreign currency, the amount held in
foreign currency accounts (FCAs) is about US$700 million,” he said. “Fifty
percent of Zimbabwe’s money supply is foreign currency and $9-10 billion is
real domestic currency.”
The central bank chief said the local currency, which has
lost ground against the United States dollar since February when the 1:1
pegging to the greenback was abolished, had depreciated extensively due to lack
of confidence in it as store of value.
He said while the interbank exchange rate stands at 15,5,
“the real exchange rate should be $5-$8. The balance is confidence and risk
premium,” he added.
Measures were underway to enhance confidence in the local
currency, including floating exchange rate system and allowing a willing-buyer,
willing-seller trading system.
“We believe in a free market system,” said Dr Mangudya.
“If we close the free market, we create the parallel
market. Between July and September there was consistency between parallel and
official exchange rate of 15-20 percent disparity.
“Our wish is to narrow the gap, which is why the RBZ
adopted the willing-buyer, willing-seller exchange rate system. This would also
be enhanced through formalisation of the economy, which currently is about
60-40 informal to formal.”
The volatility in the currency was to be expected following
currency reforms that resulted in the country de-dollarising after outlawing
the multi-currency system, said Dr Mangudya.
Zimbabwe had faced relentless instability from its reform
agenda due to the absence of external funding support unlike countries like
Argentina, which got US$57 billion and Greece, which received US$360 billion
from the IMF for their reforms.
“We do not have a lifeline, we are by ourselves,” he said.
As such, Dr Mangudya said, the solution lay in being
productive and addressing structural rigidities in the economy.
The central governor reiterated his remarks on Tuesday when
he said 50 corporates in Zimbabwe held half the country’s $19 billion total
money in circulation, meaning all the rest of us “share $9 billion and need to
grow entrepreneurship.”
Economist Persistence Gwanyanya said the introduction of
cash was part of transition to a normal economy, since all other countries use
their own fiat money currency.
“Money was being sold at premiums as high as 50 percent,
which is not desirable and which is also inflationary in nature, so that issue
needs to be sorted out with the coming of a new fiat currency,” he said.
“In my view it’s not going to cause inflation, inflation is
a function of many other factors like confidence, like manipulation of the
market, so we should be wary of those things as this fiat money is introduced.
“Our people are enterprising on currency, that’s what it is
because there are no jobs. That’s a source of livelihood for our people, so you
also need to know the circumstances that confront us that any weakness can be
taken advantage of by the market which is largely informalised and experiences
high levels of unemployment.”
Mr Gwanyanya said currency was not a permanent solution to
the country’s problems.
“We should start to seriously produce, otherwise we will
not get out of our currency crisis,” he said. “If we don’t produce, so what we
are doing are only short-term solutions, what is really important is to tackle
the issue of production head-on and tackle the issue of confidence head-on so
that our currency becomes stable.” Herald
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